Not all bonus plans are created equal - How do you build one that works? By Edi Osborne - CEO of Mentor Plus

All Bonuses Are Not Created Equal In the December issue of Mentor in a Minute, I wrote about the dysfunctional behaviors (Click here to read that article) that Christmas bonuses can cause. In the article I encouraged you to get your client to hold off on promising anything until the concept of performance based compensation could be thoroughly explored. It’s not that all bonuses are bad, but they are certainly not created equal. Dan Pink speaks to this very point on this ted.com video: http://www.ted.com/talks/dan_pink_on_motivation.html

If after watching the video you and your client still want to look for ways to connect performance to compensation, I recommend you read the book, The Great Game of Business by Jack Stack. Mr. Stack makes the case for financial and business fluency on a grand scale. He also makes the case for “bonus games” rather than making wholesale changes to compensation. Below you’ll find a brief primer on how to set up a simple bonus plan. As you go through each of the steps you might begin to notice an amazing similarity to the architecture we refer to when we build a Hierarchy of Measures for identifying strategically focused Key Performance Indicators. The reason for the common architecture is simple,

How to Set up a Bonus Plan Step-by-Step:

1) Identify key issues or goals that are critical to the company/owner.

2) Identify the drivers or activities that impact these key issues/goals. It’s important to drill down to all layers of the company (i.e., owners to front line) to determine the sequence of behavior dominoes that have an impact. There may be several critical activities that ultimately influence the outcome of a goal.

4) Examine current compensation models to determine if they stimulate or sabotage the desired behavior associated with these critical activities.

5) Establish (if they are not already) performance standards specific to the critical activities. It’s important to involve the team in the development of performance standards to which they will be asked to adhere.

6) Educate the team about the link between their behavior in the critical activities and how it affects the company. This may be as simple as playing a financial fluency[1] type game or getting more involved and teaching a full-blown financial fluency program..

7) The next step is to set up a Scoreboard that provides feedback to the team about the behavior/activities that are critical to the stated goal or objective. It’s extremely important that the team understand (in positive terms) the benefits for everyone, if and when, the stated goal is achieved. If the goal only benefits an owner or limited constituency within the company, you’re likely to find the rest of the team resentful.

8) Once the Goal is identified, key measures are established, you’ve examined the current compensation plan, and you have a reporting system in place, it’s time to develop a reward system that is directly tied to the desired performance. Keeping with the philosophy of Open-Book Management[2], we recommend starting off simple with some “games.” As opposed to a formal change in the compensation plan that commits the owner/company long-term, games allow for “testing” and refining of both the goals and measures over a limited, specific period of time.

9) Once a “game” has proven successful at stimulating a desired behavior, you may elect to convert that game into a formal bonus plan. Alternatively, you may find that once proper performance expectations have be set, you can randomly reactivate the “game” as needed and move your attentions to develop other games based on newly identified goals.

10) If the game was not successful, ask the following questions:

· Was the goal we set too high?

· Did the people we involved in the game have the authority and expertise to alter a process to achieve the desired result? In other words, did we give the team all the responsibility for changing a process and none of the authority to make it happen?

· Were there any hidden agendas within your management team that may have sabotaged the process?

· Was the goal relevant to the people asked to change it? (i.e., compensation, less stress, more overall fun, etc.)

It’s important to remember how human nature impacts this process.

1) People will remain interested in improving a process only as long as management is interested. In other words, once management stops paying attention to the critical numbers and/or stops providing meaningful feedback, the team will cease to care as well.

2) Human beings become easily bored. Therefore, it is important to update and change the games we play on a frequent basis. In many cases, games by their very nature (i.e. short term, clearly defined, fun) are better for stimulating change in an organization than the most cleverly and generously designed compensation programs.

3) Managers tend to be more interested in bonus programs. Front-line team members tend to be more interested in games.

4) Games don’t have to be about money. Some of the most successful games are based on small, but meaningful opportunities for recognition, tangible prizes such as TV’s, trips, personal time off, etc. Often times the prizes in games cost far less than bonus programs and yet achieve the same or sometimes a better result. To make the prizes seem more real, have the item or information about the prize on display.

5) People are sometimes suspicious about new measurements. They perceive them as punitive as opposed to a vehicle for new rewards. It’s important to help them understand (and quantify) the starting baseline of the game so they can assess their own performance in relation to the desired goal.

6) Games are forgiving. Because they are short term and very focused on a particular outcome, the rules of the game can change with each new area of focus. Don’t change the rules on a particular game while it is in play but do feel free to test various approaches until you find one that fits well with the culture of the organization.

One final thought, sometimes the act of measuring behaviors, in and of itself, is enough to improve outcomes. Start with measurement and see how far it will take you before you start adding money into the mix. It’s always easy to add perks, very hard to take them away once they have been instituted.